Will Your School Corporation’s Debt Exceed Capacity?

March 25, 2007

For release March 28 and thereafter A digital mug shot is available on request 607 words By Dr. Jeff Abbott

It is often difficult for patrons of an Indiana public school district to determine from media reports or even from the districts’ web sites whether their local school board has enough information to consider in sufficient depth the economic impact of a bond issue on its community.

For example, in my hometown the board of school trustees attempted to examine a proposed building project. Although the task force was a distinguished panel of local residents well versed in financial matters, and notwithstanding that the report was well done, its 60 pages did not mention that Moody’s or Standard and Poor’s rating services for bond issues were consulted on the issue of whether the school district had the capacity to pay for a compromise bond issue, much less the initially proposed issue, which was twice as large. The report stated only that:

“(T)he bond market generally considers acceptable a combination of direct and overlapping outstanding property tax-supported debt not exceeding 12 percent of the assessed or market value of real estate in a given geographic area to be acceptable.” (1)

That same report provided information as to federal government guidelines for debt capacity for communities, where the task force stated:

“This document suggests that if the combination of outstanding property-tax supported long-term debt issued by a municipality and by other units issuing overlapping debt exceeds five percent of the market value of real estate within the given jurisdiction, then the unit’s financial capability for this factor should be considered as ‘weak.’”

The task force also reported that direct and overlapping debt between two percent and five percent is considered by the U.S. Environmental Protection Agency (2) to be “mid-range” and that less than two percent is considered to be “strong” capability. It went on to conclude that the district could issue an additional debt of $172,500,000 before hitting the five percent “weak” benchmark. The task force did not make any recommendation to the district as to what the community could afford, although boosterish press reports hinted otherwise.

Although the complete data was not provided in the task force report, it was possible to interpolate using algebra and information available on the Indiana Department of Education website to determine the status of the proposed bond issue on these measures of debt capacity.

According to my calculations, this particular bond issue ($500,000,000) would result in an incurred debt of 9.36 percent of assessed value, or 4.36 percent beyond the federal government’s threshold for the “weak” classification. (3) If you use the full billion-dollar bond issue figure, as appears to be likely that the district would need within the next five years or so, then the incurred debt rises to 16.03 percent of assessed valuation.

This not only exceeds the federal government’s five percent threshold by 11.0 percent, but also exceeds the bond market’s threshold by 4.03 percent, resulting in fewer bidders and higher interest rates according to the task force. It would have been helpful, then, to have seen data showing any increased interest cost of issuing the bonds if they exceed these thresholds.

In fact, a school board that does not fully reveal the impact on the entire community of its proposed bond issue can leave a community asking a lot of financing questions:

• Will the district be able to issue bonds in the future for future needed projects? • What will be the impact on other governmental entities in the county if the school district exceeds these threshold measures? • Will they be able to issue any bonds in the foreseeable future if the district exceeds the federal government’s and bond market’s limits on debt capacity?

And finally, will exceeding these thresholds jeopardize the economic health of city and county governments, business, and citizens of the county?

Jeff Abbott, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, is an assistant professor at Indiana University-Purdue University Fort Wayne. The author is an attorney and the former superintendent at East Allen County Schools. The views are his own and not necessarily those of his employer. Contact him at jabbott@inpolicy.org.

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